Today, Apple initiated a 7-to-1 stock split which led some casual observers and America's leading financial network to think that the value of its shares plunged 85 percent this morning:
@SquawkCNBC you guys need to update your list… $aapl split doesn’t mean it lost 85% @CNBC @BeckyQuick @andrewrsorkin pic.twitter.com/MUSVaCm9yl— Nicholas Olesen CFP© (@NicholasOlesen) June 9, 2014
The split was announced back in April and even paired with a helpful Apple FAQ but it focused mostly on the mechanics rather than the motivations for doing it.
But here's the basic issue. Pre-split, a share of Apple stock was very expensive — about $650. By giving each shareholder six additional shares, Apple is creating a new situation where a share is worth a bit over $90. Since there are seven times as many shares outstanding as there were previously, the total value of the company (its market capitalization) won't change. But since a single share will be cheaper, it's now possible for a person with $300 in his pocket to buy a few shares.
Why is Apple doing this?
One reason is that to the extent that small-time retail investors have the ability to buy and hold shares, that should push Apple's overall market capitalization somewhat up and create value for existing large shareholders. This should not be a large effect, but for a well-known consumer brand with a large following it could be something.
Another issue, unstated but perhaps relevant, is that a split could make Apple eligible for inclusion in the Dow Jones Industrial Average.
This well-known stock index is very old and is still calculated through an old-fashioned method. The average in question is literally the average of the prices of a share of stock in the different companies who comprise the index. A more modern index (like the S&P 500) would be "weighted" according to the market capitalization of the companies involved. But in order to preserve historical comparability, the DJIA has never changed its weighting methodology. One consequence of the DJIA's current methodology is that if a company with a very high share price — like Apple before the split — joined the index, it would badly skew the index. This has kept Apple out of the Dow even though as the country's largest or second-largest company, it clearly deserves to be in.
Does any of this matter?
Not really. Gaining inclusion in the Dow and becoming friendlier to small-time stock buyers could both marginally increase the value of Apple stock. But the impact, if any, would be decidedly marginal. Becoming a Dow component might give a nice ego boost to some existing executives and employees.
Would this be happening if Steve Jobs were still around?
Maybe so — Apple did split twice under Jobs, June 21, 2000 and also on February 18, 2005. But but of those splits occurred before the launch of the iPhone turned Apple into a juggernaut. For better or for worse, one of the hallmarks of the Tim Cook Era at Apple has been more attention paid to the financial aspects of the company. That's paying higher dividends, spending more money on "repurchases" of Apple's shares, having dinner with Carl Icahn, and now worrying about retail investors and the DJIA's obsolete methodology.
Jobs, it seems, was more single-mindedly focused on product design and a quest for vengeance against an Android smartphone concept he regarded as "stolen." These kind of prosaic stock market concerns were not his area of interest.
Then again, Cook's focus on the stock market also fits the times. Apple is now a profit juggernaut in a way that it never was under Jobs but also is no longer enjoying the extremely rapid growth of the Jobs era. One of the tasks of a mature company is to worry more about this kind of thing.